Philip Hammond mulls VAT overhaul as Budget day looms

Philip Hammond is mulling an overhaul to the VAT system that could affect thousands of small businesses as part of next week's Budget.

The chancellor is considering dropping the current threshold - which stands at a turnover of £85,000 - in a move that could raise as much as £2bn in taxes.

City A.M. understands the motivation is not just revenue raising, but about bringing the UK in line with other countries. The UK currently has a significantly higher threshold than other European countries. It is also thought the existing threshold acts as a deterrent to small businesses, which either stop trading or lie to avoid having to pay the 20 per cent tax.

The Treasury is understood to be considering a range of options, including lowering the threshold to anywhere between £20,000 and £40,000, or freezing the threshold, which currently rises with RPI each year. The department is currently assessing a report published by the independent Office of Tax Simplification, which argues that as it stands the threshold distorts the tax system.

The report estimates that halving the threshold would affect nearly half a million small firms and give a £1bn boost to the country's coffers, while dropping it to £25,000 would yield £2bn.